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S Corporation advice

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U

ucsutah

Guest
We are company that Setup an S Corporation in Utah about 7 months ago. I have 51% acting as president of the company, and I have two other partners that have 24.5% of the company. My first mistake was not to get a lawyer to draw up all the articles of incorporation. I didn't do that we did the articles ourselves.

Now its 7 months later and I am having arguments with my partners. I mainly have two questions.

1) Are we paying ourselves correctly? This is how we have been doing it. After we pay all of our expenses then we get profit. Each of us have the same salary. We then subtract our salary from the profit to get our net profit. We take out of our salary the taxes. We now figure our distribution which is 51% of the net profit, 24.5% and 24.5% of the net profit.

This is how we paid ourselves at the beginning we did it this way and didn't know if this was the right way. After we paid all our expenses we got our net profit. We then paid ourselves accordingly to our percentages, mine 51%, and theirs 24.5%. When we figured that number we then took out our taxes according to the $200 salary. In other words we kept our salary mixed in with our distribution.

Which way is the propper way of doing it?

2) Second Question. At the beginning starting the company as an S corporation we knew that we had to pay ourselves a salary as employees/owners. We really didn't know how much to pay ourselves at the beginning so we guessed. We guessed that we should all get a $200 salary because we didn't know how much to make because it was a new business. As an example I make an average of $1000-$1500 based on my 51% distribution per month, and the other partners make $24.5% of that amount. Should my salary be higher than the other partners because I have more ownership which is 51%. And, Because I make more money should my salary be higher than my partners? I know it should be a reasonable wage, however my wages are higher than my partners. Should my salary be 51% higher to stay within the propper ratio of distribution pay?

I would apprecate some advise on these two questions.

thanks for your time :confused:
 


W

willingtocope

Guest
Wow...

Wow...not a easy question. In an S Corp, salary and "distribution" are two different things that have little to do with each other, other than the fact the distribution flows through to the S Corp shareholders as income and is taxed as such (unlike a C Corp, where the Corp pays taxes, in an S Corp its the shareholders that pay).

It sounds like you agreed on a "salary" for each individual...and, unless you state differently in the initial agreement...salary is paid regardless of how many hours per week or month a partner works. And, again, unless initially specified, salary has nothing to do with percentage owned. Since your company is indeed a company, PERHAPS a lot of your day to day expenses are really corporate expenses that you can pay before you look at what is really NET profit. Distribution of NET profit is indeed done according to percentage of shares owned. Whether you do that on a monthly basis or let it pile up for paying salaries during a rainy day is another question. Depending on whether Utah has things like worker's comp, and unemployment taxes, you need to take those into consideration as part of your overall compensation.

I'd suggest you get either some accounting or legal advice quickly...there are lots of details you need professional help answering.
 

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